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Global macro overview for 06/04/2018

On Friday morning, the US Dollar was valued at over 4.05 Turkish Lira. Previously, the USD/TRY exchange rate reached its historic maximum at 4.0657. Over the past 12 months, the Turkish currency has weakened against the dollar by 8.5 percent, and for three years lost as much as 36% of its value.

Looking at the long-term chart, one can come to the conclusion that the Turkish currency is actually on a permanent downward trend. But it intensified after the unsuccessful military coup of July 2016. The attempted coup proved unsuccessful, and as a result, President Recep Tayyip Erdogan carried out purges in the state apparatus, education, and media, including practically the Sultan rule in Turkey. At the same time, the Turkish economy is facing serious structural problems. Although the GDP growth rate is 7.3% (in Q4) and it may be impressive, the country is struggling with serious macroeconomic imbalances. The first symptom is the rapidly growing current account deficit, which in January deepened to USD 7.1 billion against USD 2.7 billion a year earlier. This means that Turkish enterprises and households are getting heavily indebted abroad. Secondly, investors are worried by the price rally, which in March amounted to 10.23% towards 10.26%. in February. CPI inflation at double-digit level has been in Turkey for over a year. And there are not very clear views about anything that could be improved in the near future. The Turkish central bank remains under strong political pressure not to raise interest rates.

Let's now take a look at the USD/TRY technical picture at the daily time frame. The market is still in the uptrend the recent high was made at the level of 4.0600. This might not be the end of the advance, as there is a Fibonacci extension target level located at 4.0850. The momentum remains strong, but first clues of a potential bearish divergence between the price and the momentum indicator are present.